Thursday, February 5, 2015

Murphy's Puzzling Reply Regarding Swiss Francs

David Beckworth–who wants a kinder, gentler Market Monetarism–sent me Bill Woolsey’s reply to my stuff about Switzerland. Sure, as with any intervention, you could do follow-up interventions to postpone the bad consequences. In this case, Woolsey (among other things) says that the Swiss might have to restrict the issuance of large-denomination bills, to thwart the desires of people to save. And this is at the “Monetary Freedom” blog, mind you.

Odd.I am not sure what was the "intervention" I was proposing or the "further intervention" that will merely "postpone" bad consequences. I believe that anyone who wants to try to borrow by issuing large denomination notes should be free to do so--if they can find someone to hold them. And further, people who want to lend by holding such notes should also be free to do so, if they can find someone to issue them.

As a rule, I don't think anyone should be obligated to either hold or issue large denomination notes against their will.In particular, if some private bank wants to issue Swiss Franc notes in large denominations, they should be free to do so. They can determine whether they can find a profitable use for the funds. If they choose to issue them, then people who want to hold them should be free to do so.
As I mentioned before, I don't favor having the Swiss National Bank, any other central bank, or any other government agency issue hand-to-hand currency. I support full privatization of hand-to-hand currency.

However, if they monopolize the issue of currency, I think they have some obligation to meet the demand. But more importantly, if they make it legal tender for all debts private and public, failure to accommodate shifts in demand is criminal. (Well, I really mean sinful and wicked.) They really should issue more when the demand to hold it rises and issue less when the demand to hold it falls.

I also favor having the interest rate paid on reserve balances float below the interest rate on other sorts of short and safe assets. Preferably, something more like a mutual fund than a debt instrument, with the yield based upon the central bank's asset portfolio and its operating costs being covered by the service fee. In other words, I don't favor having the central bank help private banks "save" either. The purpose of reserve balances should be to clear checks, banknotes, and electronic payments.

I admit that I am a bit partial to saving. Especially when savers purchase equity used to finance capital goods for private enterprise. I understand that debt finance allows for risk sharing creating gains from trade among savers. That includes bank deposits of various sorts, as well as banknotes. And I can see the value in consumer lending too. Still, savers buying newly issued stock to finance a new wing for a factory--just seems right.

But I don't favor having the government run budget deficits so that there will be a bigger national debt because savers will benefit from lending to the government. And that includes government borrowing by the issue of currency either directly or through a central bank.

So, is this violating the liberty of savers? Well, only if you believe that they are entitled to have the government create convenient assets for them to buy. I don't think that. If they want to save, they should buy private assets. You know, assets freely created by those wanting to issue them.